Mortgages

In Canada, the minimum down payment to get a mortgage on a property is 20%. However, it is possible to put as little as 5%, but you will need to take out mortgage insurance with CMHC (Canada Mortgage and Housing Corp.), Genworth or Canada Guaranty. To be eligible for an insured 5% down payment, you must also occupy the property. For a purchase over $ 500,000, you must have a minimum down payment of 5% on the first $ 500,000, then 10% on the remaining amount. For example, if you buy a $ 700,000 house, you will have to put in $ 25,000 (5% of $ 500,000), plus $ 20,000 (10% of $ 200,000), for a total of $ 45,000.

The fixed mortgage rate, as its name suggests, has the advantage of not changing during the term of the mortgage contract, usually between 3 and 5 years. However, in return for this guarantee, the fixed rates offered are lower than the variable rates. Of course, a variable rate could increase during the term, should the Bank of Canada increase its policy interest rate. If this were to occur, mortgage payments could increase. Despite this risk, over the long term, studies have shown that the variable rate is more advantageous for borrowers. It should also be noted that many variable rate mortgage contracts do not provide for an increase in payments, in the event of an increase in rates. With these contracts, the increase will result in decreasing the portion of the payment allocated to reimbursing the principal, so that the borrower will pay for the increase, but will not have to adjust his budget in the short term, due to a rate increase.

The default frequency of a mortgage payment in Canada is once a month, or 12 times a year. However, you can save money by making more frequent payments. By making bi-weekly payments, for example, the number of payments per year increases from 12 to 26. By repaying the same amount per year at a higher frequency, you decrease the average balance of your mortgage during the year. In other words, the money that was once sleeping in a bank account until the 1st of the month, instead is applied more quickly to the repayment of the principal and interest of your mortgage. In short, the higher the frequency of payments, the more you save in interest charges. As for the accelerated bi-weekly payments, the additional interest savings (compared to bi-weekly payments) is not due to the frequency of payments, but because of the increase in payments. In fact, we calculate the payment amount for the accelerated bi-weekly payments, by dividing the monthly amount by two. The result of this hocus-pocus means that the borrower makes the equivalent of one more monthly mortgage payment per year, since he makes 26 payments per year (every two weeks) and not 24 (twice a month).

Banks use the Gross Debt Servicing (GDS) ratio to calculate the maximum you can allocate to your housing expenses, including the mortgage. This ratio is calculated by dividing the annual amount you spend on your mortgage payments and other expenses related to the property, by your gross annual income (your salary before tax). The maximum acceptable ratio is 32%, which means you should not be spending more than 32% of your gross income for housing. Also, be sure to do your math before concluding that you can afford a property, after inputting the mortgage amount in the comparison tool. In addition to mortgage payments, you must add municipal and school taxes, electricity, heating, and in the case of a condo, the condo fees, (maintenance fees, etc.).